Option Investor

Daily Newsletter, Thursday, 5/10/2012

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap


by Thomas Hughes

Click here to email Thomas Hughes
Stock futures rose this morning on fresh economic data. Economic data and world news, or lack of it, boosted stocks through the day. Jobless claims and statements from Chairman Ben Bernanke helped to ease growing concerns of stagnating US domestic growth.

Initial jobless claims continued to trend down. Initial claims fell by 1,000 from an upwardly revised 368,000 to a seasonally adjusted 367,000. The upward revision increased the previous weeks figure by 3,000. The revision, while not surprising, is minimal compared to some other revisions over the past month and is still near post recession lows. Analysts had been giving conflicting estimates ranging from a gain of 365,000 to 369,000. The four week moving average moved lower this week by 5250 to 379,000. The recent spike in claims attributed to the Easter holiday and early spring will fall out of the calculation soon and the average could return to the trend seen in the early spring.

Continuing claims, which lags initial claims by one week, also fell. Claims for a second week of unemployment benefits fell by 61,000 to 3.23 million. The spike in initial claims seen over the weeks of 4/7, 4/14 and 4/21 barely register in the continuing claims data.

Total claims also continued the downward trend. Total claims for unemployment fell by more than 175,000 to 6.4 million. The unemployment data from this week and last week help relieve some of the concern over the softening economy. The unemployment rate is still falling and other signs of life exist in the economy. Last weeks jobs report was disappointing but was impacted by the shift in Easter and spring hiring and is expected to rebound as the summer approaches.

In other US economic news the trade gap widened by over 14% in March to $51.8 billion. In the report both imports and exports reached record levels but imports out paced exports by a wide margin. Economists had been expecting the increase to be around $50 billion. The report sparked some speculation that the US could lower its first quarter GDP figure. The first estimate, released last month, has US GDP expanding around 2.2% in the first quarter. Imports rose in the month by 5.2% and exports rose by 2.9%. Industrial supplies and capital goods made up a significant portion of the rise in exports and was seen as a good sign for American manufacturing.

Fed Chairman Ben Bernanke made statements in a press conference just as the markets were opening. He said that bank lending was “improving”. The improving availability of credit will “help the economy”. He also went on to say that domestic banks were benefiting from the financial crisis in Europe. The small and regional banks have been improving balance sheets and increasing revenues from deposit accounts and lending. The financial sector was one of today's leaders. The financial spider (XLF) gained close to 1% today. The financial sector could be finding support at the $15 level. The string of recent lows in the stock price are divergent from the momentum indicator.

Financial Sector Spider, daily

JP Morgan took a dive in after hours trading when the company reported significant trading losses. The banking giant said that losses could reach $800 million in the second quarter.

Asian markets ended their day mixed as weaker than expected trade data from China set traders on edge. Growth of China's exports came in about half as good as expected. Economists had been expecting a figure around 8.5% growth but the actual increase was 4.9%. The Hang Seng index lost 0.51%, the Nikkei lost -.39% and the Shang Hai index gained 0.07%.

European shares traded higher today and Spain gained over 3% as the embattled region looks past recent developments. European markets made broad gains but have not recovered from recent selling pressure. Spain, though up sharply in today's trading, is still down over 17% year to date. There are still hurdles and concerns for European growth. The Bank of England announced it is stopping its quantitative easing due to mounting inflationary concerns. In Greece, new government hopeful Tsipras seemingly went back on earlier statements that the bail out package was “null and void”. In today's statements he is reported as saying he will go “as far as he can” to keep Greece in the Euro zone.

The price of oil and gas held steady today as well. Uncertainty looms over the market as traders weigh new statements from OPEC. According to the cartel world demand has grown this year by 90,000 barrels a day but that the economic outlook remains fragile. The increase is mainly in America and Japan. Shut down of Japan's nuclear power facilities have given rise to their increased need. In the US demand is attributed to industrial consumption.

Gold prices remained steady through out the day. Prices traded up to $1600 but failed to cross that line in the first half of the day. Copper led the metals with a gain near 1%.

Bond rates rose today. The rate of the US 30 year bond closed at 3.05%.

30 Year Bond Rates, daily

Cisco's shares dropped more than 10% today following the announcement of earnings yesterday after the closing bell. The shares took a hit on weaker than expected sales outlook for the next quarter and full year. The guidance sent the entire complex lower from suppliers to rivals. Sales in the recently ended quarter were up over 6% and profits up 20% from last year. The outlook for the next quarter is weak due to slow enterprise sales and softness in Europe. The company guided growth estimates in the 2-3% range for the next quarter. The software maker received a round of downgrades this morning following the report.

Cisco, daily

Rivals Juniper Networks and Riverbed Technology made new lows in the wake of Cisco's warnings.

Juniper Networks, daily

Riverbed Technology, daily

Earnings rolled on today with over 120 expected reports. News Corp's third quarter earnings beat the Street's expectations and jumped 47%. The scandal that has rocked the journalism empire may have helped to boost sales. The stock gained close to 6% in today's trading.

News Corp, daily

Steel maker Arcelor-Mittal gained roughly 2.5% today after reporting a steep drop in quarterly profits from last year in the same period. The results are an improvement over the fourth quarter of 2011 when the company posted a loss. Strength in the US offset weakness in Europe, which the company says remains a challenge.

Arcelor-Mittal, daily

ATP Oil and Gas dropped 9% today following its release. The company reported a drop in revenue despite successfully shifting production to focus more heavily on oil and liquids. Now, with the price of oil dropping the shift may be too late. The drop came on heavy volume and declining momentum.

ATP Oil and Gas, daily

Retailer Kohl's failed to deliver earnings and lost 4.5% of share value on heavy trading. The discount retailer reported an increase in sales but heavy discounting cut deeply into margins. Kohl's says it is positioned well for the up coming summer and back to school season. It is also planning to open 10 new stores by the fall.

Kohl's, daily

LED maker Universal Display Corporation was another big loser today. The company missed big on revenue. The company earned just over $12 million in the quarter, about 25% less than expected and the outlook for the next quarter is not any better. Analysts are looking for revenue around $28 million.

Universal Display Corporation, daily

The IPO market is staying active. There were ten listed IPO's at the start of the week and one more added today. Facebook is officially listed as opening May 17, 2012. Ironically, at the same time the schedule was listed Facebook was announcing that mobile adds are not converting to revenue as expected. The business segment could negatively impact Facebook's earnings in the coming quarters.

WageWorks opened at the bottom end of its expected range but was met with investor enthusiasm. The company is a consumer-directed provider of on demand health spending account benefits. The stock opened at $9.88 and quickly gained $1 to close up by more than 20%.

WageWorks, one day

Audience is a provider of voice and audio solutions for mobile devices. The stock was expected top price in a range of $14-$16 and opened at $19.20. The stock traded around that level all day.

Audience, one day

Western Asset Mortgage Capital Corporation priced at $18.80, below the expected range. The stock trade sideways throughout the day. The company invests in GSE backed residential mortgage securities.

Western Asset Mortgage Capital Corporation, one day

Avon rallied early today as rival Coty increased its bid for the larger cosmetic distributor. The euphoria quickly wore off as the stock traded down from the morning high. Coty raised its bid for Avon to $24.75 per share. The offer has gained the attention of Warren Buffet who has put the backing of Berkshire-Hathaway behind the offer.

Avon Products, daily

Stocks struggled to maintain their gains today. Economic data was better but just not quite enough to alleviate concerns of further economic weakness in the second and third quarters of 2012. The Dow was up more than 60 points this morning after the open and managed to hold that level through the first hour of trading. Then, around 10:45, the indexes began to give up their gains with the Nasdaq leading the way and dropping into negative territory. The Dow held positive through the day and closed up by 0.2%. The Dow is trading toward the bottom of a recent trading range between 12,750 and 13,300.

Dow Jones Index, daily

The S&P is trading roughly in line with the Dow. The broader index is moving in a similar trading range between 1325 and 1425. The recent series of lows in the index is divergent from momentum and has brought the index to a support level.

S&P, daily

The VIX retreated 6% today to close below 19. The volatility index made a bounce down from the 200 day moving average to close below the 20 resistance level.

Volatility Index, daily

The Nasdaq was the loser of the day, dropping by 1 point below yesterday's close. The index was dragged down by Cisco and other computer network related stocks. The index is just above significant support at 2900 and bears close watching.

Nasdaq, daily

The JP Morgan news has S&P futures down in the after markets and could impact trading in the morning.

Economic data will be the driving force of the markets as the earnings season nears its end. The outlook for the next quarter is deteriorating and data will help give a clearer indication of whether fears are misplaced. China is releasing a string of important economic data points tomorrow and could mover the markets. At home look out for the Producer Price Index, more earnings and new developments from Europe.

Thomas Hughes

New Plays

Chinese Internet

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates:

(bullish ideas) PB, ADM, SCG, INCY,

(bearish ideas) KORS, MSB, BID, EXLP, CTRP, BRM


Sohu.com - SOHU - close: 46.09 change: -1.31

Stop Loss: 47.25
Target(s): 40.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SOHU is a Chinese Internet company. Shares have been underperforming since they reported earnings in late April and management lowered their guidance. Now the stock is testing support in the $46-45 area. The 2011 low was $$45.40. I am suggesting a trigger to launch small bearish positions at $44.90.

I do consider this a more aggressive, higher-risk trade. We want to keep our position small because the most recent data listed short interest at almost 34% of the small 29.75 million-share float. If triggered we'll use a stop loss at $47.25. Our target is $40.25.
FYI: The Point & Figure chart for SOHU is bearish with a $35.00 target.

Trigger @ $44.90

Suggested Position: short SOHU stock @ (trigger)

- or -

buy the Jun $42.50 PUT (SOHU1216R42.5) current ask $1.70

Annotated chart:

Entry on May xx at $ xx.xx
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 915 thousand
Listed on May 10, 2011

In Play Updates and Reviews

No Clear Trend

by James Brown

Click here to email James Brown

Editor's Note:
There was no clear trend for stocks on Thursday although technology stocks struggled thanks to weakness in Cisco (CSCO).

Readers may want to start taking profits in our HITK trade. We are planning to exit our GRPN trade tomorrow. TSO was stopped out.

Current Portfolio:

BULLISH Play Updates

Ryland Group - RYL - close: 23.25 change: +0.60

Stop Loss: 21.80
Target(s): 25.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

05/10 update: There was no follow through on yesterday's relative strength in RYL. Shares pulled back with a -3.3% decline. The stock remains inside this $22-23.50 trading range.

I am suggesting a trigger to open small bullish positions at $23.60. We'll use a stop loss at 21.80. We want to keep our position size small because the homebuilders can be so volatile. Our target is $25.75. FYI: The Point & Figure chart for RYL is bullish with a $34.50 target.

Trigger @ 23.60

Suggested Position: buy RYL stock @ (trigger)

- or -

buy the Jun $24 call (RYL1216F24)

Entry on May xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on May 9, 2011

U.S. Bancorp - USB - close: 31.91 change: +0.44

Stop Loss: 30.90
Target(s): 34.75
Current Gain/Loss: - 1.0%
Time Frame: 3 to 6 weeks
New Positions: see below

05/10 update: The financial stocks were showing relative strength today and USB outpaced its peers with a +1.3% gain. Today's move appears to be a bullish breakout from its recent consolidation. Unfortunately tomorrow could be challenging for the financial stocks. After the closing bell tonight JPM announced significant losses in its credit portfolio and that could spark selling pressure across the sector. I would hesitate to launch positions tomorrow.

Our target is $34.75 but more aggressive traders could aim higher.

current Position: Long USB stock @ $32.25

- or -

Long May $32 call (USB1219E32) Entry $0.70

05/01/12 triggered @ 32.25

Entry on May 01 at $32.25
Earnings Date 07/18/12 (unconfirmed)
Average Daily Volume = 10.3 million
Listed on April 30, 2011

Meridian Biosciences - VIVO - close: 19.88 change: +0.08

Stop Loss: 19.10
Target(s): 22.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

05/10 update: VIVO is still drifting higher. Shares briefly traded above resistance near $20.00 on an intraday basis.

Aggressive traders may want to launch bullish positions now. I am suggesting a trigger at $20.25. We'll use a stop loss at $19.10. Our multi-week target is $22.00.

Trigger @ $20.25

Suggested Position: buy VIVO stock @ (trigger)

Entry on May xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 281 thousand
Listed on May 8, 2011

BEARISH Play Updates

Endo Pharma. - ENDP - close: 33.30 change: +0.28

Stop Loss: 35.05
Target(s): 30.25
Current Gain/Loss: + 0.4%
Time Frame: 3 to 6 weeks
New Positions: see below

05/10 update: ENDP recouped about a third of yesterday's losses with another bounce from the $33.00 level. Readers may want to wait for a new failed rally near $34.00 before considering new bearish positions.

Our target is $30.50. More aggressive traders could aim lower. The Point & Figure chart for ENDP is bearish with a $28 target.

current Position: short ENDP stock @ $33.45

- or -

Long May $35 put (ENDP1219Q35) Entry $1.85

05/08/12 triggered at $33.45

Entry on May 08 at $33.45
Earnings Date 05/01/12
Average Daily Volume = 1.4 million
Listed on May 5, 2011

Greenhill & Co. - GHL - close: 37.43 change: +0.01

Stop Loss: 38.75
Target(s): 34.25
Current Gain/Loss: - 0.5%
Time Frame: 3 to 6 weeks
New Positions: see below

05/10 update: It was a very quiet day for shares of GHL. The stock closed virtually unchanged on the session. I am expecting the bounce to stall at what should be resistance near $38.00. I'd wait for shares to near $38.00 or fail near $38.00 before considering new positions.

Earlier Comments:
We do want to keep our position size small since being short GHL is a popular trade. The most recent data listed short interest at 18.5% of the small 26.8 million share float. That does raise the risk of a short squeeze.
FYI: The Point & Figure chart for GHL is bearish with a $29 target.

(small positions)

current Position: short GHL stock @ 37.25

05/05/12 new stop loss @ 38.75
05/03/12 triggered @ 37.25

Entry on May 03 at $37.25
Earnings Date 07/18/12 (unconfirmed)
Average Daily Volume = 508 thousand
Listed on May 2, 2011

Groupon, Inc. - GRPN - close: 9.87 change: -0.20

Stop Loss: 10.65
Target(s): 8.50
Current Gain/Loss: + 8.6%
Time Frame: exit prior to May 14th earnings report
New Positions: see below

05/10 update: GRPN underperformed with a -1.9% decline. Today marks a new record closing low for the stock. The company is due to report earnings after the closing bell on Monday, May 14th. We do not want to hold over the report. I am suggesting we exit positions tomorrow (Friday) at the closing bell. You may want to exit your trade on Monday instead.

Please note our new stop loss at $10.65. Remember this is an aggressive, higher-risk trade.

Earlier Comments:
Investors are unhappy with management, worried about earnings, and concerned that the upcoming lock up expiration could put even more pressure on the stock. The lock up period expires on June 1st (delayed from May 2nd). I do consider this an aggressive, higher-risk trade. The trend is down but GRPN is definitely oversold at this point. We want to use small positions to limit our risk. Readers may want to use options to limit their risk even further. We do not want to hold over the May 14th earnings report.

(Small positions)

Suggested Position: short GRPN stock @ $10.80

- or -

Long May $10 put (GRPN1219Q10) Entry $0.90

05/10/12 prepare to exit tomorrow (Friday) at the close,
new stop loss @ 10.65
05/05/12 new stop loss @ 11.55. more conservative traders may want to take profits now (trade is up +7.7%).
Adjusted exit target to $8.50

Entry on May 02 at $10.80
Earnings Date 05/14/12 (confirmed)
Average Daily Volume = 2.6 million
Listed on May 01, 2011

Hi Tech Pharmacal - HITK - close: 31.91 change: -0.26

Stop Loss: 34.05
Target(s): $30.50
Current Gain/Loss: + 7.2%
Time Frame: 2 to 4 weeks
New Positions: see below

05/10 update: It has taken more than three weeks but HITK is testing its April lows. Shares are also flirting with a breakdown under support near $32.00 and its 300-dma. More conservative traders will want to lock in gains now. I am not suggesting new positions at this time.

current Position: short HITK stock @ $34.40

05/09/12 new stop loss @ 34.05
05/08/12 readers may want to exit immediately
05/07/12 new stop loss @ 34.65
04/21/12 new stop loss @ 35.05, adjust exit target to $30.50
04/19/12 planned exit for our April put: $1.30 (-13.3%)
04/18/12 prepare to exit our April $35 puts at the close tomorrow
04/14/12 new stop loss @ 35.55
04/10/12 triggered at $34.40

Entry on April 10 at $34.40
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 155 thousand
Listed on April 09, 2011

Hospira Inc. - HSP - close: 33.90 change: -0.20

Stop Loss: 34.25
Target(s): 30.25
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

05/10 update: HSP popped higher at the open but slowly drifted lower the rest of the session. There is no change from my prior comments. I am suggesting a trigger to launch bearish positions at $33.20. If triggered we will aim for the $30.25 mark.

FYI: Readers should note that HSP does have above average short interest. The most recent data listed short interest at 7.8% of the 165 million share float.

Trigger @ 33.20

Suggested Position: short HSP stock @ (trigger)

- or -

buy the Jun $30 PUT (HSP1216R30)

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 9, 2011

NetApp, Inc. - NTAP - close: 35.70 change: -2.08

Stop Loss: 38.25
Target(s): 34.50
Current Gain/Loss: + 5.4%
Time Frame: exit prior to the May 23rd earnings report
New Positions: see below

05/10 update: The -5.5% plunge in NTAP may have been influenced by the drop in shares of CSCO, which weighed on the tech sector today. I am lowering our stop loss on NTAP down to $38.25. I am not suggesting new positions at this time.

If you're holding the May puts you may want to exit now (it's already up +94%).

Earlier Comments:
The plan was to keep our position size small to limit our risk. We do not want to hold over the late May earnings report (date still unconfirmed). FYI: The Point & Figure chart for NTAP is bearish with a $31 target.

(small positions)

current Position: short NTAP stock @ $37.75

- or -

Long May $37 PUT (NTAP1219Q37) Entry $0.86

05/10/12 new stop loss @ 38.25
05/08/12 triggered @ 37.75
05/05/12 new stop loss @ 39.65, only use small positions.

Entry on May 08 at $37.75
Earnings Date 05/23/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on May 3, 2011

Visteon Corp. - VC - close: 45.32 change: +0.20

Stop Loss: 48.25
Target(s): 40.50
Current Gain/Loss: + 0.9%
Time Frame: 4 to 6 weeks
New Positions: see below

05/10 update: VC bounced up toward resistance near $46.00 this morning before slowly fading lower the rest of the day. This move looks like a new bearish entry point but readers may want to tighten their stop loss. FYI: The Point & Figure chart for VC is bearish with a $35 target. NOTE: VC does have options but the bid/ask spread seems too wide to trade.

current Position: short VC stock @ $45.75

05/08/12 triggered @ 45.75

Entry on May 08 at $45.75
Earnings Date 05/02/12
Average Daily Volume = 513 thousand
Listed on May 5, 2011


Tesoro Corp. - TSO - close: 22.93 change: +0.68

Stop Loss: 23.25
Target(s): 18.25
Current Gain/Loss: - 8.0%
Time Frame: 4 to 8 weeks
New Positions: see below

05/10 update: A big two-day bounce on decent volume was enough to end our bearish trade in TSO. The stock got a boost today thanks to an upgrade to a "buy" this morning. Our stop loss was hit at $23.25.

closed Position: short TSO stock @ $21.53 exit $23.25 (-8.0%)

- or -

Jun $20 put (TSO1216R20) Entry $0.66 exit $0.30 (-54.5%)

05/10/12 stopped out at $23.25


Entry on May 08 at $21.53
Earnings Date 05/02/12
Average Daily Volume = 3.3 million
Listed on May 7, 2011